EU court rules second-hand sales of digital goods legal

CURIA - the Court of Justice of the European Union - has handed down a ruling in a software reselling case which, on the face of it, makes the resale of digitally distributed software officially legal throughout the EU.

The case of Oracle v. UsedSoft came about when the former company took exception to the latter reselling software licences - arguing, quite fairly, that the end-user licence agreement (EULA) under which the software was originally sold contained a specific term forbidding the licence from being transferred to a third party. UsedSoft, a far smaller company based in Germany, was reselling these licences to people who thought Oracle's pricing was set too high.

As with any other industry, second-hand sales are a serious problem for software makers. Each second-hand sale results in zero income for the rightholder, and it's far easier to argue that every second-hand sale represents a lost first-hand sale as, unlike retrieving the software for free through illicit means, the buyer is at least willing to part with some cash for the product.

The second-hand problem is one of the biggest driving forces in the move to digital distribution today. In addition to saving on production and distribution costs and cutting out the middleman for improved profit, digital distribution - with its in-built digital rights management (DRM) facilities and restrictive end-user licence agreements - effectively kills the second-hand market, forcing users to splash out if they want to buy the latest software or play the latest games.

At least, it did until now.

Ruling on the case of UsedSoft v. Oracle - case C-128/11 - CURIA has found that the so-called 'doctrine of first sale' applies to digitally distributed software just as much as it does its physical counterpart, upholding an earlier ruling by the Bundesgerichtshof (German Federal Court of Justice) in the case.

The doctrine of first sale is simple: when you sell your product to a user, you exhaust your right of distribution for that particular copy with the right transferring to the buyer. As CURIA explains in its ruling: 'A rightholder who has marketed a copy in the territory of a Member State of the EU thus loses the right to rely on his monopoly of exploitation in order to oppose the resale of that copy.'

Oracle, for its part, had argued that the doctrine of first sale does not apply to digitally distributed software as there is no physical product - just an agreement between the buyer and seller for the former to use the latter's product.

CURIA's response? Balderdash. 'The principle of exhaustion of the distribution right applies not only where the copyright holder markets copies of his software on a material medium (CD-ROM or DVD) but also where he distributes them by means of downloads from his website. Where the copyright holder makes available to his customer a copy – tangible or intangible – and at the same time concludes, in return form payment of a fee, a licence agreement granting the customer the right to use that copy for an unlimited period, that rightholder sells the copy to the customer and thus exhausts his exclusive distribution right. Such a transaction involves a transfer of the right of ownership of the copy.

'Therefore, even if the licence agreement prohibits a further transfer, the rightholder can no longer oppose the resale of that copy.'

The ruling is not only a blow for Oracle, but a major change in the way digital distribution services as a whole can operate. Currently, it's not possible to resell software purchased from Steam, Origin, or other digital distribution platforms - but CURIA's ruling in the case means that Valve, EA et al will need to add that facility into their system in order to continue to offer the services in the EU. It also means that digital distribution is no longer a solution to the second-hand market, taking away one of the biggest reasons for publishers to support the system.

In addition to full-version software downloads - including, we note, Microsoft's $39.99 upgrade offer for Windows 8 - the ruling would also affect downloadable content (DLC) for games. In the cases where a game is provided with a single-use code for add-on content - a common method for discouraging second-hand purchases of retail console games - publishers will now need to provide a means for users to transfer that content to a third party in the event of the game being sold.

The ruling does put some onus on the reseller to ensure that they are not breaking the law: CURIA states clearly that the seller must make the copy on his or her computer unusable at the time or resale or fall foul of the rightholder's exclusive right of reproduction. It's also not possible to buy multi-user licences at a discount and then split them into individual units, with licences needing to be sold in the same groupings as originally purchased.

Despite these mild restrictions, CURIA's ruling on the case is going to have a major impact on the EU-wide digital distribution market. Thus far, no digital distribution companies have commented on the ruling.